Warren on Wealth

Money, get back
I’m alright, Jack, keep your hands off my stack
money, it’s a hit
don’t give me that do goody good bullshit
I’m in the hi-fidelity first class travelling set
and I think I need a Lear jet…

People have asked me what I think of Warren E. Buffett’s editorial about taxes, so I thought I do a short post on some aspects of his commentary.

As Buffet notes, our wars are being fought by the poor and middle class. That is usually how war go-you generally do not see billionaires taking a bullet on the field of war. On the plus side, at least there is no longer the open practice of buying one’s way out of service by sending a substitute (a not uncommon practice during the civil war).

Buffet says that he paid $6,938,744 in taxes last year. As he points out, that is a lot of money. However, when considering taxes it is not just a matter of the total dollars-what also matters is the percentage. In Buffet’s case, that was only 17.4% of his taxable income, which is a pretty good deal. As he points out, most people who make much less pay a larger percentage of their income. Naturally, they will pay less in total dollars, but they will be giving up more of their income and thus have less left (both in terms of the percentage of income and, of course, total dollars).

On the face of it, this seems unfair. After all, the less wealthy are contributing a greater percentage of their income than the wealthy. This can, of course, be countered by the claim that the rich pay more taxes in terms of the total money and as such an individual rich person contributes more total dollars than a middle class or poor person. To use an analogy, if Sally is very strong and she is, along with Sherman and Winston, moving their Nordic Track, she might only be using 17% of her strength while Sherman and Winston are using much more as a percentage of their feeble power. Sally is, of course, doing more than her fair share because she is so much stronger than Sherman and Winston. Likewise, the poor and middle class give a greater percentage in taxes, but actually give less overall dollars.

This analogy works nicely in situations that are comparable to bearing a shared burden. However, the analogy seems to break when one considers income rather than strength. To use an analogy for this sort of situation, consider water. To survive, a person needs a certain amount of water and, likewise, needs a certain amount of money. If Sally has 1,000,000 times the water she needs to survive and meet her needs, then giving up 17% or more is not a hardship for her-she still has plenty left. If Sherman has just what he needs to survive, then any water tax would end up putting his life in danger. Likewise for money: people who make less are less able to afford the taxes because they are left with less with which to survive and meet their expenses. As such, taking more from those who have less seems rather problematic.

While Buffet argues for increasing the taxes on the rich, an alternative is, of course, to lower the taxes on the middle class and the poor. If Buffet is taxed at 17%, then perhaps the middle class should be taxed at 5% or 1%.

While this is appealing, there is a major problem: we need to have tax income in order to pay for things like police, defense, infrastructure, education, the CDC, the FDA, the FAA, the FBI, the CIA, and so on. In this case, the situation is something like the Nordic Track situation: we have a burden we must share and people must either contribute enough to carry the load or we must lighten the load. But, as noted above, it is also like the water situation: people need the income for their own well being and survival. So, the challenge is to leave people what they need to survive and thrive while also keeping our civilization going.

I agree with Buffet that it makes sense to have the rich contribute more than they do now, in terms of percentages.

Of course, as Buffet addressees, certain people will cry out that tax increases will destroy jobs. But, as he points out, the tax rates for the rich were much higher in the 1980s and 1990s. However, as history shows, people did not stay away from investing. While Buffet does not make this point, consider whether or not you would stop working just because tax rates had gone up. Obviously you would not-you still need (and want) money and hence will keep doing what you do to make money. People who invest money will not stop investing simply because of higher taxes. After all, they will still make money if they invest wisely.

Buffet also points out the fact that between 1980 and 2000 40 million new jobs were created. After the Bush tax cuts, job creation has slowed and we are experiencing high unemployment. If taxes were the main causal factor regarding hiring, what should have happened is higher unemployment in that time and high employment during this time of low taxes. As such, lowering taxes is not a magic bullet for unemployment.

Buffet also notes that, as always, the rich have gotten richer. In 1992 the top 400 taxable incomes added up to $16.9 billion, with a tax rate of 29.2%. In 2008, the income for the top 400 had increased to $90.9 billion, but the tax rate was 21.5%. Buffet does not note that income for the rest of us has stagnated or declined, which is a point worth considering. Given the massive wealth of the 400, it makes me wonder what basis there can be for crying that they have been taxed enough already.

Buffet concludes by contending that the rich should pay more, while the middle and lower classes should be left as is (that is, with the Bush tax cuts intact). His main argument is a moral one: the rich have much and many Americans are hurting. As such, the rich should pay a bit more for the good of the whole.

One stock reply to Buffet’s view is that rich people can pay more if they like. That is true-and, in fact, some rich folks have done just that. However, there is still the question of what is fair and right. Going back to the Nordic Track analogy, Sally could put in more effort if she wanted to, but there is also the question of how much she should contribute. One view is that those who are strong ought to help those who are weak and not merely please themselves. Another view is that the weak should fend for themselves and the strong should not be compelled or encouraged to aid those less able. There are, of course, other views-but these present the challenge in a clear manner.

During my recent testimony before the Senate Budget Committee (found here), I cited an OECD statistic that the U.S. has the most progressive income tax system among industrialized nations.[1] This prompted one Senator to point out that if the richest 10% of taxpayers earn the most of any OECD country, shouldn’t it make sense that they bear the largest tax burden of any country?

The answer can be found in the OECD table below. This table shows the share of taxes paid by the richest 10 percent of households, the share of all market income earned by that group, and the ratio of what that 10 percent of households pays in taxes versus what they earn as a share of the nation’s income.

The first column shows that the top 10 percent of households in the U.S. pays 45.1 percent of all income taxes (both personal income and payroll taxes combined) in the country. Italy is the only other country in which the top 10 percent of households pays more than 40 percent of the income tax burden (42.2%). Meanwhile, the average tax burden for the top decile of households in OECD countries is 31.6 percent.

By contrast, column #2 shows that the richest decile in America earned 33.5 percent of the market income in the country in 2005 – the year in which this snapshot was taken, but little has changed since then. But, a few other countries do have a greater or similar concentration of income as does the U.S. For example, the OECD table shows that the wealthiest decile of households in Italy and Poland earn a greater share of their country’s market income than do our “rich” – 35.8 percent and 33.9 percent respectively – while the share of income earned by the top decile of households in the U.K. is about on par with those in the U.S. at 32.3 percent.

If I am reading this right, 10% of the population gets 33.5% of the income while paying 45.1% of the taxes. If these numbers are correct, then a case can be made that they are paying too much. After all, one might argue that the income to tax ratio should be 1:1 (so that the 10% who get 33.5% should pay 33.5% of the taxes). Of course, other factors might be relevant in determining a fair rate. For example, folks who have extremely low incomes (such as the poor and grad students) might justly “underpay” there taxes because giving up more of the little they have would be a significant burden (when I was a grad student, I had just enough income for rent and food-I had no car, phone, cable or luxuries of any sort).

It is also a point of interest that 10% of the population has so much wealth. Are they truly that amazingly amazing that they earn every cent or is there, perhaps, some unfairness here?

The guy who works 60 hours/week for 52 weeks for $10/hour would make $31200. After deductions he’d be taxed on maybe $25k. I’m working with ’04 figures here because my other tax info is in the basement. So he’d have $28k to play with, more or less. He’d ‘easily’ clear the poverty line by nearly $18k and he’d be livin’ large. 🙂

dhammett: Don’t know exactly what point you are trying to make, but I think we agree on principle that in America if you are willing to work hard you should be able to earn a decent living, eat well, live in a safe neighborhood, have access to medical care, etc.

Where I think we disagree is how to achieve these ends.

In my view, the way the help those at the bottom of the economic ladder is to make their work more valuable by making labor scarce. The law of supply and demand works for labor as well as goods, and if labor is scarce wages have to rise.

I hope we would agree that in reality there are many Americans right now who are in fact working very hard yet not receiving the kind of wage that can provide them a “decent living. .. ” (including access to whatever level of education might be necessary to prepare them for the jobs that will provide them with that living wage).

I know one way we can make labor scarce. Send all the illegals back to Mexico–all 10.5-11 million of them. Round them up–likely over the next 10-20 years, pack them into buses, and drive them home. Of course, unless the process is adequately funded (with tax money) it likely be as successful as the (arguably failed) ” war on drugs”. However, I have a feeling that most of the jobs that will open up as a result of the mass deportation are not likely to provide the “decent living” you refer to.

And of course, if labor becomes scarce –or “overvalued” in the view of owners and CEOs–not always one and the same– a company might increase the rate at which it’s cutting its work force in the USA and move some or all of its business overseas. After all, a publicly-owned corporation must consider the interests of its shareholders (and even occasionally its owners, CEOs, etc in their struggles to survive and meet the bottom line .And of course an occasional Enron-or-Tyco-like corporation might be working to line the pockets of the few at the expense of the many.

Isn’t Buffet–or anyone for that matter–always able to pay more in taxes that is required? You, too?

Many places in Europe are going away from your thinking.

And since when is pay supposed to be fair? I mean, were you ambushed by the system after grad school? Did you say to yourself: “Holy Crap, I thought I’d be raking in millions as a philosopher!” No–as you’ve pointed out in other posts, there are more motivations than just money. Of course you argued this in endorsing taking money away from people earning lots of it. Would you want to pump gas for $200,000 a year? I don’t think I would. Some would, but some wouldn’t.

You just want your cake and eat it, too. You want the job you enjoy most, and you want to get paid what Buffet does. I’m really beginning to believe the theory that intellectuals almost always end up being socialists because they’re jealous that their skills don’t translate to bigger cash-ins. They’re so sure that they’re so valuable and should be paid more, and if not, well, someone must have cheated his way to the top. Let’s take more from them. The fact is–they do pay more. Lots more.

Also, in today’s world, the rich can always pick up their ball and go to another country. Which harms America.

Yes, people can always pay more. Philanthropists usually opt to spend money on their own causes, though-which is a point worth considering (would we do better choosing where our money goes?).

Pay should be fair. Are you saying that it should be unfair? How would one even argue for that?

Hmm, I’d pump gas for $200,000 a year for a few years and invest the money.

I don’t expect to get paid what Buffet does. As a matter of fact, people are unwilling to pay vast sums of money for mere education. I would have to amuse the masses with wit, shallowness, beauty or the right sort of athletic prowess to make big money. Or I would need to get into the wizardry of financial magic-producing numbers and raking in the money.

I do think that I should be paid more-but this is no special failing of mine. Also, I think that the value I contribute to society exceeds what I am paid. At the very least, consider the base numbers of what a college education is worth and calculate my contribution based on the classes I teach, etc.

Some rich folks earned their way, some did not. Some professors earned their way, some did not. Asking the rich to pay taxes is hardly based on the assumption they cheated. They could earn every cent and still be obligated to pay. Same for the poor folks.

I’m curious as to why the rich are so violently and passionately defended while the middle and lower class folks(union people, professors, state workers, the poor and so on) are savagely attacked as lazy, socialist, jealous, and so on. Why cry out for the rich man?

I’m not saying pay should be unfair. I’m saying that the wealth redistribution schemes seem to make even more unfair than it already is. It amounts to stealing when taken too far. Our government takes in more tax money than any other government, but it’s still not enough for liberals. As TJ pointed out, we have an eating problem, not an exercise problem.

I’m for fair taxation and less government spending. The rich paying 90% of our taxes does not seem fair and actually, it encourages government over-spending because the majority of people don’t have to pay for their excess. And since majorities usually determine the outcome of elections, that’s important. I’m for everyone carrying the load. That’s why, if there are any tax increases, it should be in the form of a VAT. A consumption tax that helps prevent escaping payment through loopholes.

We should learn from the European experience. Rarely in history has the warning been so clear. We’re not where Europe is or was before it began it’s welfare-state crash, but we’re headed there. We have some things on our side, not the least of which is our birth rate, which is necessary to support our current entitlement system. A issue, though, is that liberals think the birthrate is a problem.

Today, a record number of Americans—52 million, or 36 percent of all filers—have no direct connection with the basic cost of government because they pay no income taxes. If we add this group to the people who have some income but don’t file a tax return, the ranks of American households outside the income tax system rise to 48 percent.[1]

Indeed, many of these 52 million tax filers now look to the IRS as a source of income thanks to the more than $100 billion in refundable tax credits paid to people who have no income tax liability.

As a result of removing millions of people from the bottom of the tax rolls, we have dramatically reduced the number of people with “skin in the game.” Indeed, the top 1 percent of taxpayers now pays a greater share of the income tax burden than the bottom 90 percent combined.

Sadly, individuals are not the only taxpayers looking to the IRS as a source of income. The proliferation of tax credits aimed at promoting technologies such as renewable energy and fuel-efficient products has addicted many companies and industries to IRS handouts. In a recent case, one-third of the profits of a major appliance company were attributable to energy production credits.

Ironically, but perhaps not surprisingly, the sectors suffering the biggest financial crises today—health care, housing, and state and local governments—all receive the most subsidies through the tax code. The cure for what ails these industries is to be weaned off the tax code, not given more subsidies through such things as the First Time Homebuyer’s Credit, Premium Assistance credits, or more tax-free bonds.

Washington can actually do more for the American people by doing less. The solution lies in fundamental tax reform. Indeed, as the plan authored by Erskine Bowles and Alan Simpson (co-chairmen of President Obama’s National Commission on Fiscal Responsibility and Reform), demonstrated, Americans could enjoy much lower tax rates, and the government could raise the same amount of revenue if most—if not all—tax expenditures were eliminated.

That said, the primary goal of fundamental tax reform should not be raising more money for government. The primary goal should be improving the nation’s long-term economic growth and lifting living standards.

It is probably also worth pointing out that Warren Buffet makes most of his money through capital gains, which are taxed at 15%. This is essentially gambling income, and Buffet is a good gambler.

The rest of us have a lot of trouble getting *any* capital gains, and instead have been losing money in the stock market. The problem here is that if you lose money, you can only deduct up to $3,000 of your losses from your income. So if you win you pay tax, and if you lose you are out of luck.

It’s also worth noting that Buffet wasn’t born into a millionaire’s environment. The Wikipedia section on his early life provides a brief view of his life as the son of a businessman/politician.

And if you lose $15k, you can deduct $3000 every year until you have no more left of the loss to deduct. It’s still a loss, but being able to deduct the entire loss– and not just $3000– makes us poor gamblers fairly fortunate in the overall scheme of things.

tjb: Comforting to know, isn’t it? Still makes you fortunate compared to many, many other people in this country. . . And consider this–in many parts of the world you’d be much less likely to live 50 years to recoup your losses. Count your blessings my friend. Warren does.

I do–very much so. And my goal is to try to preserve what is special about the US, which means it should not be allowed to turn into another Euro-style welfare state.

And–let’s face it–these conversations always start off by talking about Warren Buffett but wind up deciding that households making $200K/yr are “rich” even though they struggle to pay for college tuition and save for retirement.

“these conversations”
Not this one. I’ve always seen $250k as an arbitrary figure. The figure could, and should, be closer to $1 million.
My wife and I have never made more than $95k combined salaries , interest, and capital gains. We didn’t have to struggle to pay for college or save for retirement. We managed our personal finances carefully, and we’ve lived quite well

Oddly enough, Fox News claimed that teachers are wealthy when they make way less than $200,000.

$200,000 seems like quite a nice sum of money-at least outside of places that have insane cost of living. My parents got by on far less (adjusting the dollars, of course). Of course, they were (are) both fat cat teachers. 🙂

Chester E. Finn Jr., president of the Thomas B. Fordham Institute, a conservative-leaning education policy group, said the decline in teachers’ status traced to the success of unions in paying teachers and granting job security based on their years of service, not ability.

“They are reaping a bitter harvest that they didn’t individually plant but their profession has planted over 50 years, going from a respected profession to a mass work force in which everyone is treated as if they are interchangeable, as in the steel mills of yesteryear,” Mr. Finn said.

TJB:” Regarding teachers, something to think about.” But from a different angle.

‘Respect’, like the devil, can assume different forms, I guess.
First– Consider ‘respect’ before tenure and before these preposterously high teacher’s wages. It’s possible to ‘respect’ a ‘professional’ who’s willing to accept a very low salary relative to others in the community of college graduates–because, after all, she’s teaching for the ‘love of the children’. It’s especially easy to ‘respect her if that ‘respect” means your taxes will be lower.
And it’s possible to respect a professional who is subject to arbitrary dismissal by a local school board because a school board member has a relative who has recently graduated and is looking for a job near home. That’s called nepotism, I believe, and even after tenure it lives on in a different form in the practice of stringing along well-qualified professionals by hiring them as substitutes but refusing to hire them as permanent teachers because the relative of a person of influence is “in the educational pipeline” and will soon be looking for a job.

And I’m not so certain that the ‘respected’ teacher of the pre-tenure, pre-union era would have fared as well dealing with 21st century problem students who bring big bags of problems with them that didn’t even exist in the good ol’ days.

In the following piece Ms Rhee seems to contradict the view expressed in the vid @2:45–3+ (i.e. expressing the positive benefits of collective bargaining in the past–yet leaving unmentioned what might happen without collective bargaining rights in the future).
Again, I’ll avoid wasting your time by providing a clear specific reference . Read from the gray-highlighted section near the bottom of the page on to the end.

.She’s dead on about good teachers and bad teachers. But then name a profession, public or private that doesn’t have good performers on one hand and those who skate through on family name, good looks,general favoritism etc. Yes, the military may be the exception, but we don’t live in a military state. Unions aren’t the only culprits. School board members with relatives they want to hire , principals or superintendents or board members who keep a favorite wood shop teacher who, in the past, finished his kitchen for a pittance, etc. etc.). And I wouldn’t be surprised large school district supply and building contracts sometimes factor into hiring choices.

Her approach to the problem can hardly be described as “nuanced”. . .In your first vid she looks straight into the camera and says “We ^absolutely^ support workers and workers’ rights to organize. We also support the concept of the workers’ rights to collective bargaining. We think that workers should ^always^ have a right to have a say in their salaries, benefits, ETC. and without the protection of unions in our nation’s history workers were ^often^ taken advantage of. . .” Read the following and see how that statement holds up.

I’m sure, thought, that in the second year you can carry over $3k of the previous year’s losses. Wouldn’t that make your tax in year two 15% of the second year’s $97k gain (after carry over loss)? Much nearer to $14550. Follow Buffet’s path and parlay that into billions! 🙂

Typical vid reply. I simply skipped 2+mins until I got to the Q about unions. Of course she’s all for unions (because of what did happen and would most certainly happen if unions disappeared), but. . . . She doesn’t mention that much of the anti-union rhetoric out there (even if it’s not her viewpoint) centers around eliminating in its entirety teachers’ right to collectively bargain–thus gutting the unions and eliminating the very protections she lauds unions for providing.

A little off topic, but still can be applied to government growing out of control,

Read the following quote in a paper that’s required reading for my Tactical Intelligence class:

“When the diverse fail to converse, post facto commissions or study groups usually come
to the same two conclusions; expand and reorganize. The ‗usual suspects‘ seldom suggest that
less might be more. Arguing for fewer boats is not the way sailors become admirals.
Unfortunately, increasing size, complexity, and cost (or shuffling the deck chairs) does little to
coordinate the uncoordinated or reduce the noise level in warning systems.” ~ Warren, Donovan, “Signals and Noise in Intelligence”, Small Wars Journal, 27AUG2010

magus71: Since you took us a little off topic I’d like to veer a bit more.
I like that clause-“When the diverse fail to converse. . .” That seems to be US in a nutshell these days.
For the sake of my point I’ll assume a generalized definition here: “one or many who are different, unlike, etc. in their ethnicity, religion, political ideology, culture in general, etc”.

Some opine that diversity is, on balance, bad. Others believe that it is, generally, good. As would be expected, the fringe members of either side “fail to converse”. So, unfortunately, do quite a few in the middle. Instead, they talk past one another, blinded, ironically, by their inability to deal with diverse viewpoints.

What to do? Admittedly, as Mr. Donovan avers, many commissions, in his view, fail. But I could just as easily conclude, also without providing proof, that many succeed. But proof of either assertion would, I believe, require a massive amount of unbiased research I see nothing provided here by Mr. Donovan’ to support his assertion that these “groups ‘usually ‘ come to the same two conclusions; expand and reorganize” — although it may be such a truism in the US intelligence agency context that it needs no proof there.

I’ve got a solution to the lack of conversation between the diverse. . We could simply eliminate one or more sides of the “failure to converse. Eliminate Army intelligence and Navy intelligence and keep Marine intelligence. –whichever one(s) the commission(s) or study group(s) decide.
Can anyone out there provide a more practical solution, short of creating another commission , that’s less radical than mass elimination of those whose views or approaches we don’t agree with?